Technical analysis uses charts, showing stock movements (prices & volumes), as a tool to predict how stock prices will evolve in the future. Chartists believe that the market is only 10% logical and 90% psychological.
Fundamental analysis seek to determine a firm intrinsic value based on its expected growth rate, dividend payout, interest rates and risks. Fundamental analysts believe that market is 90% logical and 10% psychological.
Two main principles:
- All information about earnings, dividends and future performance of a company is already reflected in company’s past stock prices.
- Prices tend to move in trends, and trends tend to continue until something happens to change the supply-demand balance e.g. if a stock is rising it will continue rising. The prices at what the trend is about to change are called resistance levels.
Fundamentalist’s primary concern is what a stock is really worth, which is based on the estimation of four key determinants: growth rate, dividend payout, degree of risk, and the level of market interest rates.
Using Fundamental and Technical Analysis together
- Buy only companies that are expected to have above-average earning growth for five or more years.
- Never pay more for a stock than its firm foundation of value
- Look for stocks whose stories of anticipated growth are the kind on which investors can build castles in the air